“Hunker Down with This 10.9% Yield!”

By Travis Johnson, Stock Gumshoe, August 8, 2011

On days like this, we see a relatively small number of stock-pickers come out aggressively pushing a “buy this one stock” idea — I suppose that’s partly because newsletter editors like to see the market shake out before going out on a limb, and also probably partly because the way to make money in this business is often by fanning flames of fear, not by suggesting a buy when the market is cratering.

But today I did start receiving one interesting “buy this stock now” pitch from a relatively sober newsletter guy, Roger Conrad — it’s for his Big Yield Hunting newsletter, which tends to be more aggressive than his Utility Forecaster or Canadian Edge letters, but we’ve seen plenty of interesting ideas from him in the past … so let’s see what he’s talking about, shall we?

Here’s the intro:

“Savvy income investors are weathering the economic storms with this high, double-digit yield—spurred by the blockbuster growth of mobile technology in emerging markets.”

OK, sounds intriguing — as, of course, does that 10.9% yield (though after the market drop over the last couple of days, LOTS of stocks are approaching tempting double-digit yields for the first time since the 2008/2009 panic.

Some more details?

Well, the ad is being tested with several different subject lines — one is “what can bandwidth in Africa do for you?” and another is “get in this Congo line to the bank” … get it, Congo? Right.

So yes, this is a stock that has at least something to do with the booming demand for telecom, particularly mobile, in Africa … here’s some more from Roger by way of clues:

“I’ve just bagged a big yielder for my Big Yield Hunters. I’ve tracked it for years in Utility Forecaster, but it’s never been quite right for that portfolio with my extra layer of required safety….

“The company experienced some difficulties stemming from the rising demand for mobile devices and the pressures which resulted—the need for restructuring, increased production and employee layoffs.

“But in spite of its past troubles, it hasn’t cut its dividend in 10 years. That’s a pretty impressive track record….

“… this company is Johnny-on-the-spot with an offer to buy this African country’s fourth-largest mobile telecom company. Plans are in place to add 11 million MORE customers in this one small African country in the next 5 years. And that’s just part of this company’s daring plan to add 85 million NEW customers by 2015!”

A few more details for us to toss into the Thinkolator:

“It already operates in 16 countries in the Middle East and Africa. That can be a blessing or a curse as many of these countries are hot spots of political unrest—but where telecom demand is ballistic.”

So who are we looking at here? Well, in the end we had to do a little translation and toss it all instead into Le Thinkolateur, because it appears this must be France Telecom (FTE)

Yes, FTE is a core old-school telecom company in one of the most old-school of European countries, with that landline infrastructure foundation that generally means great cash flow and high debt in most developed economies (not unlike Verizon here in the US) — and like most oldline telecom companies, they’re looking for growth through wireless and, in FTE’s case, through global expansion, including in Africa (and, probably not coincidentally, including a strong presence in some of the former French colonies where there are still plenty of Francophones) — their big global wireless brand is Orange.

FTE is selling off some European assets (including a recent plan to sell their Swiss holdings) in order to focus on the much faster growing continent to their South, with significant acquisitions over the last couple years in Morocco and Iraq (OK, Iraq isn’t quite Africa on most maps — they’re going Middle East & Africa with their growth plans), and a presence in about 20 countries in the region.

Their latest big deal, as hinted at in the subject lines of the ad, is in the Democratic Republic of Congo (DRC), where they’re in exclusive negotiations to buy the fourth largest wireless operator from the Chinese company ZTE. “Fourth largest” doesn’t sound all that exciting, but the DRC is one of the biggest countries in Africa and it is probably among the least-penetrated big markets in Africa when it comes to mobile phone ownership and usage. That said, there are three other substantial DRC mobile phone firms, and they’re all run by firms at least as big and formidable as France Telecom (the three others are owned by Bharti Airtel, MIC, and Vodafone).

FTE’s dividend is a bit of an odd bird, but it is in the neighborhood of 10% — the stock has been an income investors darling for years, as are many telecom companies, but it has not done much by way of capital appreciation recently. Since the dot com crash recovery in 2002, FTE has generally traded in the range of $20-30 most of the time — so it probably hurts shareholders that the stock is now back down into the teens again, though the dividend has indeed been (and continues to be) a substantial salve.

And by “odd” I mean “not quarterly” — they tend to pay their dividends at the beginning and end of their fiscal year, so you get one in May or June (the final dividend) and one in August or September (the interim dividend), and that’s it for the year.

They generally pay out all of their earnings and sometimes more as dividends (they can do this because, like many telecoms, their free cash flow is generally significantly higher than their accounting earnings — noncash items like depreciation on their expensive assets cut earnings, but don’t cut their ability to pay a dividend, at least not in the short term). They have given guidance for 1.40 euros in dividends both this year and next, which translates into $1.99 and would be an effective yield of about 10.8% as they hit their new 52-week low around $18.40. I don’t know if they have a withholding tax on top of that, but the last year’s total (for FY 2010 came in at $1.95 at then current exchange rates, and was just finalized with the payment of $1.17 in June. The interim dividend for 2011 will come, I imagine, sometime in the next month or so and will probably, if history is a guide, be in the neighborhood of 80 cents US.

Assuming one can rely on their guidance, you can theoretically count on getting back at least 20% of your cash over the next two years if you buy this stock — which isn’t to say that the shares can’t fall more than that, or that they can’t, if they have to, cut the dividend. But still, not bad.

They are a big and indebted company — roughly a $50 billion market cap and another $50 billion in debt, so it is perhaps positive that they’re aiming to pay down debt and invest in growth as they sell of some of their “slow growth” assets in “old Europe,” where the bulk of their revenue is still generated, but counting in a big return in addition to the dividend might be a bit optimistic given their performance over the past decade.

Are you a fan of Orange and France Telecom, or are you afraid it’s a “dividend trap” or still too bloated? Let us know with a comment below.


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6 Comments on "“Hunker Down with This 10.9% Yield!”"

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Cool Soupy
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Cool Soupy
August 8, 2011 6:05 pm

Too many bargains out there to considerdebt leveraged companies?

The Brell
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The Brell
August 8, 2011 11:33 pm

I tend to agree with the above comment following the decimation of the global markets; an embarrassment of riches syndrome

Matt
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Matt
August 9, 2011 12:53 am

Travis, After reading your post that included SeaDrill (SDRL), I purchaed some myself with the recent drop in price. SDRL is a much better bet than this debt laden French telecom.

Chris
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Chris
August 11, 2011 11:55 am

Interesting that Conrad would recommend it ………..in the August Utility Forecaster he rates it a HOLD.

joe dobbs
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joe dobbs
August 18, 2011 1:08 am

by the way France assesses a 25% foreign tax on the dividend, that makes the real dividend yield 8.18% still not bad.

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August 11, 2011 1:48 pm

Thanks for the update — he does say the he looks for riskier high-yield picks in this letter whereas Utility Forecaster is a more conservative portfolio, but we also do often see newsletters use a full-throated "buy now" tease for a stock in their ads months after the editor has actually recommended selling the pick, sometimes a story that's easy for the marketers to sell wins out over an actual investment idea.

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